The most encouraging financial news that I have heard in months came from the Barnes Buchanan (financial) Conference in West Palm Beach, Fla. earlier this month. I arrived to a buzz of enthusiasm, to be told that attendance was the best ever. Mike Barnes, principal of Barnes Associates Inc., in St. Louis and Bryan Lawrence, an attorney with the Pittsburgh office of Buchanan Ingersoll & Rooney, in unison assured me that the banking community was there in force. Since 1986, Barnes' firm has been involved in more than 230 alarm company acquisitions and financings-- an aggregate transaction value in excess of $5 billion.
The Barnes Buchanan Conference is a boutique financial conference that draws a very dynamic group of bankers and brokers who provide funding to alarm companies and monitoring businesses. For the most part, these players keep a pretty low profile in the industry, albeit their dollars turn the wheels behind much of the day to day operations on the RMR (recurring monthly revenue) side of the security business. Also present were the CEOâ€™s and presidents of well known, high-profile alarm sales and installation companies and alarm monitoring companies including Protection One, ADT, ASG and Monitronics, just to name a few, as well as an established regional alarm company opening their own central station for their customers and a residential alarm company with a unique product offering. They came to develop the funding needed to grow their businesses, to continue their work with the banking partners, and to keep up with whatâ€™s happening in the market. Barnes has been benchmarking the health, transactions and operating metrics of alarm monitoring since the 80s and the community at large uses his data as their guide to properly measure the operating costs of a company.
"I started Barnes Associates in late 1985, 23 years ago," Barnes said. "After several merger and acquisitions deals it became obvious to me that the industry didnâ€™t fully understand the operating dynamic of the typical security alarm company. The big insight was that these companies have two distinctly different operating functions: 1. the monitoring and service of existing customers and systems; 2. the sale and installation of new customers and systems. While these are interrelated (i.e. more sales typically yields more RMRâ€¦depending upon attrition), it became obvious that modeling the financial and operating performance required each of these activities to be estimated, projected and analyzed separately."
More importantly what Barnes discovered in doing this research was that that "the vast majority of the industry actually lost money on the sales and installation activity--particularly when G&A costs (General & Administrative (expense)) and overhead was properly allocated to this (correct) activity, and any accounting treatments are unwoundâ€¦such as capitalizing (to make the most of) some or all of the direct costs."
This created a significant strain in the M&A (mergers and acquisitions) market for obvious reasons. The unwillingness to just accept this information is what "morphed into our more comprehensive benchmarking program and capability as we continued to measure this information annually," Barnes added.
During the economic slowdown in the early 90s Barnes enhanced his research because funding simply became less available. In reaction to this, Barnes continued, "we did three things: continued to document the performance envelope of alarm companies; formally tracked all transactions in the industry correlating them to the performance metrics; and looked for a way to more easily educate the capital markets, particularly potential new lenders to the industry, about the industry. This last point resulted in our co-founding the Barnes Buchanan conference in 1995."